RIT Capital Partners sits in the Capital Allocators sleeve of The Tiny Family Office portfolio: This sleeve contains vehicles whose edge lies not in operating leverage but in long-term capital allocation across cycles. They deploy capital often better than I ever could.

Founded as the Rothschild family office and listed in 1988, RIT was designed to compound real wealth across generations.

Since inception, RIT has compounded NAV at an impressive rate of ~10.4% per annum. Over the last decade alone, NAV (not share price) has more than doubled. Yet today the shares trade at a ~25–30% discount to NAV, reflecting skepticism toward private assets, structural complexity, and the investment-trust format rather than underlying economics.

Recent evidence directly challenges that skepticism. Over the last ~18 months, RIT has realized roughly 25% of its private portfolio, with exits at or above carrying values, including notable realizations in AI and fintech. As of September 2025, NAV total return is ~10% year-to-date, with all three portfolio pillars contributing positively.

Management incentives are unusually well aligned: bonuses are capped, largely paid in shares with multi-year vesting, and subject to clawbacks. The Rothschild family remains a >20% shareholder, reinforcing generational stewardship.

At current prices, even conservative assumptions imply mid-single-digit returns; a partial narrowing of the discount lifts expected IRRs into the low-double-digit range.

Share Performance & The Tiny Family Office Portfolio

The performance of RIT must be viewed over decades and cycles. Taking just the last ten or twenty years (chart by Sharesight above) this certainly does not seem like a great investment, does it? It has underperformed the broad indices. Let’s see.

A portion of my portfolio is invested in Capital Allocators. This investment theme or portfolio sleeve exists for businesses whose primary skill is decision-making with capital.

There are a couple of good examples in Europe or the UK: RIT Capital, EXOR NV, Sofina SA, Investor AB. But also good capital allocators can be found in the U.S.. There is especially one: Berkshire Hathaway. Although Berkshire is an outlier because it is much more involved in actual operations of businesses.

Often these capital allocators have a family background which I like very much. They allocate capital across companies, geographies, and asset classes. They have access to investment vehicles and deals that I could never have as a private investor. In a crisis they are not hesitant to deploy capital or could even function as a lender of last resort (before the Fed) in the example of Berkshire Hathaway.

RIT fits naturally into my portfolio. It is neither a traditional equity fund nor a private-equity vehicle or a hedge fund. It is a permanent-capital allocator that combines all three, supported by a network built over decades and incentives designed for longevity. It is a publicly traded investment trust with permanent capital.

Portfolio & Performance Overview: Three Pillars, Three Behaviours

RIT’s portfolio is deliberately structured around three return engines, each designed to behave differently across market environments:

• Quoted Equities: liquid, diversified, mark-to-market compounding through direct investments and fund managers

• Private Investments: growth (important), and asymmetric upside

• Uncorrelated Strategies: absolute return, hedge funds, credit funds working as a volatility dampener and capital stabiliser

The key insight: these pillars are not meant to outperform simultaneously. They are meant to coexist, allowing the trust to compound through regimes rather than chase cycles. This is very similar to how I built the portfolio of The Tiny Family Office.

The above chart shows the performance contributions by portfolio pillar since 2015. Example: If you look at 2024 this means that Quoted Equities contributed 6.9 percentage points of performance to the NAV, Private Investments 1.8 %, Uncorrelated Strategies 1.3 % and Currencies -0.3 %, leading to a Total Investment Performance of 9.7% across the whole portfolio (unadjusted for borrowings) for 2024. I produced this chart to look particularly at Uncorrelated Strategies. The RIT management seems to be doing a very good job allocating capital there, because contributions to Total Performance were positive in every year (except 2022), exactly what I want to see in a portfolio containing alternatives.

The chart above shows how stable (or unstable) the allocations in the three pillars were as % of total NAV. After 2020 valuations for Private Investments were definitely over the top, which is reflected in the sudden rise as a % of NAV. These valuations have come down by now, and also RIT management has been reducing exposure to private assets taking advantage of valuations. In the next steps I will examine every pillar one by one to get you through the portfolio.

Pillar I: Quoted Equities

RIT’s quoted equity portfolio is best understood as a collection of high-conviction themes expressed through a mix of direct holdings and specialist managers, rather than a top-down geographic allocation.

The U.S. remains core but capital has increasingly flowed to Europe and Asia, also highlighted in recent interviews with the CEO Maggie Fanari. This reflects a belief that returns are broadening in a more multipolar world.

Rather than relying on broad indices, RIT partners with specialist managers who bring deep domain expertise. RIT also holds direct, high-conviction public equities, typically businesses with strong competitive positions, durable cash flows, and long reinvestment runways. As of July 2025 the split in the equities section was roughly 50/50 between direct investments and fund managers. The portfolio is centered around certain themes:

• China & Asia: specialist managers focusing on domestic champions, platform businesses, and mispriced cyclicals

• Quality: companies with high barriers to entry

• Japan: exploiting corporate-governance reform, balance-sheet optimisation, and shareholder-friendly capital allocation

• Healthcare & Biotech

• SMID: overlooked target segment outside mega-cap consensus trades

Below you will find an overview of individual stock holdings and also funds:

One question that naturally comes up: what would RIT’s results have looked like if the quoted equity sleeve had simply been a passive global index fund? In some years, especially during periods of U.S. megacap dominance, the answer is probably yes, returns would have looked better on a narrow, ex-post basis.

But that’s not the right test. RIT’s equity book is not built to win every momentum regime. It is built to diversify return sources, avoid single-factor dependence, and interact sensibly with the private and uncorrelated sleeves. Replacing it with a passive index would likely have increased correlation to global equities, amplified drawdowns, and changed the portfolio’s behaviour in precisely the environments where RIT is supposed to earn its keep.

Pillar II: Private Investments

Private investments are the most misunderstood, and (probably) most valuable hidden part of RIT.

They currently represent ~30% of NAV, down from over 40% in 2022 following substantial realizations. The reduction was intentional by management, and they have clearly stated that they will continue to keep the target range of 25 to 30% of NAV.

RIT either invests directly in private deals or partners with a small group of elite managers. These managers are often oversubscribed and selective in whom they allocate capacity to.

Key partners include:

• Thrive Capital: known for backing category-defining technology companies such as OpenAI; long-term, founder-aligned

• Greenoaks: disciplined growth investor (e.g. Scale AI, Coupang)

• Iconiq: late-stage growth with deep access to global tech founders

• Ribbit Capital: fintech specialist (Xapo, Stripe, Kraken)

• Founders Fund: contrarian technology investing

• BDT/MSD: long-duration family capital

These relationships give RIT something rare: both fund exposure and selective co-investment access.

Direct Private Holdings: Examples & Realisations

RIT’s direct private portfolio focuses on category leaders. Management stated they do not intend to make any speculative early-stage bets. A few examples:

Management has stated that ~99% of direct private holdings are either profitable or have >12 months of cash runway, which materially lowers downside risk (in theory).

“Investments are considered profitable on the basis of either EBITDA, FCF or Net Income.”

This is where accounting definitions deserve skepticism. EBITDA profitability, in particular, can be a very forgiving concept. It is useful for lenders, less so for owners. Charlie Munger would likely have dismissed the footnote in a single sentence.

That said, this statistic is not central to the investment case. What matters far more is the quality of the allocation decisions, the quality of the fund managers.

As visible in the chart(s) below, investments are diversified by position sizing, fund sizing and also by sector / industry.

Over the last ~18 months, RIT has realized roughly 25% of its private portfolio, including:

• £175m of realizations in 1H25 alone

• Exits historically averaging ~23% above carrying values

• Recent highlighted exits ~100% above carrying values

There is no guarantee that the remaining 30% of NAV can only be realized below carrying values.

Personally, I remain cautious towards private equity and valuations in this sector. The recent offering of products to retail investors in this sector is not a great thing, it is a warning sign.

RIT has an experienced management team, and access to the top-notch private equity funds and investments. If I want any exposure to this sector then most likely through these top funds and through RIT. I will avoid anything else. I am aware of the discount the market currently assigns to RIT, and I am certain that this is not totally wrong. However, as you will read later, I highly doubt that a 25% discount is justified.

Pillar III: Uncorrelated Strategies

The uncorrelated sleeve exists for one purpose: allowing RIT to stay invested elsewhere when markets dislocate.

This pillar includes:

• Absolute-return hedge funds

• Macro and market-neutral strategies

• Public credit (explicitly not private credit)

• Gold and select real assets

Management has been explicit in recent interviews about avoiding private credit, preferring liquidity and true diversification over yield illusion. I like that approach.

In early 2025 among market volatility due to tariffs, this sleeve delivered mid-single-digit positive returns, exactly as intended, and over time has usually had positive contributions to overall returns.

At The Tiny Family Office I also have between 20 and 30% of capital allocated to uncorrelated strategies. My own exposure is a bit lower to credit strategies compared to RIT, but also includes macro, multi-strategy, and equity market neutral funds, as well as gold.

Management, Incentives, and Alignment

RIT’s governance structure is very aligned for a listed vehicle.

• The bonus pool is capped at 0.75% of NAV

• In negative years bonuses are obviously lower

• High-water marks apply

• ~60% of variable pay in shares, multi-year vesting (3 years + 2 year lock-up)

• Clawback and malus provisions

The Rothschild family owns >20% of the trust, anchoring the shareholder base with permanent capital. I like this very much, it gives me a better feeling as an investor that my interests are aligned with other large shareholders.

The CEO: Maggie Fanari

Maggie Fanari spent nearly two decades at Ontario Teachers’ Pension Plan. She invested across public markets, venture, growth equity, and private assets globally and ran a high-conviction public equity portfolio. I do not expect RIT to suddenly employ a super successful concentrated investment strategy in equities such as TCI under Chris Hohn, but I believe that Maggie Fanari will certainly allocate capital across the various portfolio pillars in a prudent and rational way to ensure the investment goals are met.

Under her leadership, RIT has already made rational portfolio realizations in private markets, initiated buybacks (to close the discount to NAV), and increased investor engagement.

The Discount

RIT trades at a ~25–30% discount to NAV. Management has responded rationally with:

• ~10% of shares retired since 2023 (roughly £300m)

• YTD approximately £75.6m of shares adding an estimated accretion benefit of +76bps of NAV

The discount does not need to close for RIT to work. It merely provides upside optionality. Historically RIT even traded at a premium to NAV. Worth to keep in mind: During the time it traded at a premium (from 2015 to 2019) private assets were roughly 25% of NAV. I think management will reduce today’s numbers back to 25% again. The question is: Will that change anything in the discount? I do not know.

If realizations continue to work, however, the discount should close at some point or at least get closer to 0 than it is now.

Investment Thesis

At current prices, and assuming a 2% dividend is paid each year and reinvested I calculated some scenarios based on a ten year investment horizon:

• 4% NAV growth, discount unchanged → ~6% IRR

• 4% NAV growth, discount narrows to 10% within 10 years→ ~8% IRR

• 7% NAV growth, discount narrows to 15% → ~10–11% IRR

The issue with investment trusts is always that there is absolutely no guarantee that the discounts will close at some point.

Another prominent example: Exor NV. It is the holding company of the Agnelli family with many public investments in companies like Ferrari or Philips. The discount is closer to 50%, and management has also been addressing this issue by selling off (an in my opinion) overvalued holding like Ferrari to buy back shares. RIT Capital, however, is materially more diversified than Exor, so I would not want to compare these two directly.

RIT Capital Partners is not a free lunch, and I do not want to treat the current discount as something that must close. Besides the fact that the discount may continue to persists there are more risks.

Private asset returns may normalize. If exit multiples compress, IPO windows close intermittently, and realizations slow.

Markets could remain narrowly concentrated. If equity returns continue to be driven by a small group of large U.S. technology companies, RIT’s diversified, global, manager-driven approach may lag simple beta for extended periods.

The correct way to think about RIT is not as a “discount-closing trade”. At the current valuation I basically get the private investment portfolio for free while the equity and absolute return section should provide satisfactory returns alone over the next years to come. If the discount narrows, returns accelerate. If it does not, I will still earn NAV growth driven by disciplined capital allocation, private realizations, and crisis resilience.

Summary

RIT Capital Partners is for investors seeking durable compounding, access, and resilience, run by people who think in decades.

Looking at investor outcomes since 2010, RIT’s performance appears underwhelming, particularly for non-GBP investors. From a EUR perspective, total returns compounded at roughly 5.41% p.a. over the last 15 years. This is based on the share price (not NAV). A passive global equity index would have performed materially better over this period.

This underperformance reflects a decade dominated by U.S. megacap equities, a narrowing opportunity set, and limited reward for diversification. RIT’s structure paid a real opportunity cost during this regime. The investment case today therefore does not rest on what worked from 2010–2025, but on whether the next decade will resemble the last decades.

The market currently penalizes RIT for complexity and its exposure to private assets. I do not believe that this is justified in the long run. If it is because private assets are overvalued then the equity market as a whole also will have problems with valuations. Keeping in mind the recent realizations, the capital allocation discipline, aligned executive incentives and the overall long term returns I find the penalty excessive. I currently hold RIT since more than a year at 1.5% of my portfolio, a deliberately cautious allocation. I am comfortable with this position and view it as a long-term holding.

This is not investment advice. Please read the disclaimer.

Everyone has an emerging markets story to sell: Asia, rising middle classes, consumption. The problem is most of those stories assume straight lines and ignore how bad policy, bad incentives and bad capital allocation can wreck good demographics. We should also not forget about geopolitical tensions and conflicts.

Overall, the data still say one thing quite clearly: the centre of gravity of global GDP and consumption is drifting toward today’s “emerging” world. PwC projects that by 2050, six of the seven largest economies (PPP) will be emerging markets; China, India and Indonesia sit in the top four, and the E7 economies together dwarf the G7. Asia as a whole is on track for roughly half of global GDP and ~40% of global consumption by 2040.

FMCG has been a laggard and an unloved sector for years. Probably because companies like Procter & Gamble have not yet figured out how to build a datacenter or design the latest chips. Starting from high valuation multiples (paying 30x earnings for a company growing 3%YoY is rarely a great idea), higher real rates, and cost inflation have taken multiples and sentiment down. But the winning FMCG companies of tomorrow are likely the leaders of today. They have strong brands, pricing power, distribution networks and an established presence on the shelf and in the consumer’s mind.

While growth across the FMCG sector will not be spectacular, emerging markets offer attractive opportunities. And ageing populations in developed markets still consume for longer.

The Big Picture: Gravity Is Moving

PwC’s World in 2050 model is built on demographics and productivity:

• The world economy can more than double in size by 2050 (real, PPP).

• The E7 (China, India, Indonesia, Brazil, Russia, Mexico, Turkey) grows to almost half of global GDP; the G7 drifts to roughly a quarter.

• China and India together become larger than the US and EU combined on PPP terms.

• When the model was built there was no talk about AI. I think the model may look a bit different today, but the direction is similar.

You don’t need exact percentages to see the point. By 2040 Asia alone could represent roughly 50% of global GDP and 40% of global consumption.

Demographics

Demographics don’t tell us where stock prices will be next year. They do tell us where the customers are likely to be over 20–30 years.

Young where it matters

PwC and UN data show:

• The G7 working-age population shrinks materially out to 2050.

• Countries like India, Indonesia, Vietnam, the Philippines, Nigeria and Pakistan still have rising working-age cohorts.

• Even EMs age fast from a low base. Old-age dependency ratios climb, but they stay structurally younger than the G7.

So the world for the next decades looks roughly like this: a lot of older people in rich countries, and a lot of younger and middle-aged people in emerging markets that are gradually moving closer to rich-country income levels.

But coming back to the consumer:

• Those older cohorts do not stop consuming. They may change what they consume (more health, personal care, home care, probably less alcohol or sugar depending on personal preference…). As long as the population ages without shrinking too fast this is acceptable for me as an investor.

• Those younger EM cohorts move up the ladder from basics to branded to premium across categories: food, beverages, personal care. They become more like developed market consumers.

People consume longer

Life expectancy is higher in almost every region than it was for the last generation, and it may be even higher in the future. That means more years of consuming everyday products.

So we have two simultaneous facts:

1. EM and ASEAN add hundreds of millions of new consumers to the branded economy (about 140 million in ASEAN alone).

2. Ageing stretches the period over which people consume basic FMCG products in developed countries often with higher spend on health, wellness and personal care.

From an FMCG perspective, this is a long-duration demand story: more consumers, consuming for longer, with room for premiumisation in many categories.

What the EM Consumer Actually Buys

Consumption happens in S-curves. Early in life and at low income levels, you focus on necessities. As incomes rise, spending accelerates and broadens across categories. Later in life, consumption tends to level off again. That pattern is driven by both age and income. There is only so much toothpaste you can use per day, no matter how much you earn. Let’s take this across categories with some examples:

• Food: from loose staples and street food → packaged staples, branded noodles, sauces, snacks → higher protein and dairy, better quality and safety.

• Beverages: from water and tea at home → branded soft drinks and RTD coffee → functional, low/no sugar, “better for me” drinks.

• Home & personal care: from basic soap and generic washing powder → specialized detergents, shampoos, deodorants → skin care, baby care, colour cosmetics, fragrance.

In ASEAN specifically, BCG’s “Next Chapter” piece sketches the demand engine clearly:

• A MAC (Middle-class and Affluent Consumer) population of about 330m today grows to about ~415m within a decade.

• A “twin-engine” pattern where lower MAC trades up cautiously and upper MAC behaves more like developed-market consumers in health, sustainability and brand preferences.

• Heavy use of digital channels, social commerce and “shoppertainment” as part of the shopping journey.

The sectors I care about are the ones that sit right in the middle of these shifts and get touched multiple times a day and also multiple times across various consumer cohorts: food, beverages, home care, oral care, personal care and everyday beauty.

FMCG: A Defensive Sector That Can Still Hurt You

FMCG has a great marketing deck for investors. We see non-discretionary categories, strong brands with pricing power, resilience in recessions, healthy balance sheets and increasing dividend streams. None of those protects you from overpaying, or from owning the wrong businesses in the sector.

The recent fall of alcohol-related stocks is a clear lesson: when consumption projections shift it has massive effects on the whole investment case. Most investors talk about “staples” as if they’re all the same. They are not. There is a narrow group of compounding machines and a long tail of mediocre assets. It is no coincidence that companies like Nestlé or Unilever were already among the largest food companies in the 1990s and still dominate today. That persistence tells you something about the economics and moats in this space.

The staples sector has had quite a bad run over the last few years. There were inputs cost spikes, squeezed margins, FX-related earnings misses, private label competition. The consumer is trading down. Also coming from high valuations after a decade of very low interest rates there were some re-ratings in the sector. This combination of fundamentally resilient businesses with weaker recent share-price performance and less fashionable narratives is exactly what made me have another look at individual names. Structurally and in the long term, I think the sector remains attractive, but only for the right companies at the right price.

What I Want to Own for Decades

Tom Russo has spent decades owning global consumer brands through every kind of disruption. His framework resonates strongly with me, and I recommend watching a few of his interviews on WealthTrack or listening to recent podcasts with him. Keeping in mind Russo’s principles at The Tiny Family Office I want to own businesses in the FMCG sector with a few important characteristics:

Indispensable products

• Products that are used daily and are hard to cut even in stress: staples, basic beverages, oral care, household cleaning, basic beauty and skincare.

• No optional luxuries (I own LVMH - but that is a different story)

Businesses that have already proven they can survive

• Businesses that have already operated for decades in difficult environments like South Africa, Indonesia, Brazil, India, China

• They know how to work around tariffs, wage spikes, FX restrictions, random taxes.

Aligned stewards & globally leading position

• Either family control or owner-like management

• Willingness to spend heavily on capex, brands and distribution during bad times

• Sometimes size matters: in many categories the leading FMCG companies today are likely to still be among the leaders in 20–30 years.

The Bear Case: When the Theme Does Not Work

The bear case is not that demographics will change quickly or that GDP projections are completely wrong. The bear case is that companies fail to capture the consumer. This may happen for many reasons:

• failure to capture digital shifts and consumer preferences (e.g. shoppertainment on TikTok)

• local and regional brands gaining market share (we may see some uprising Asian staples giants with global reach in the future)

• political shifts including price controls, windfall profit taxes, tariffs or other restrictions along with FX risks

• management mistakes, M&A at peak multiples, endless restructuring (when restructuring costs become a yearly part of your financial statements as it happens in industries like Airlines then something is not right), SBC and compensation packages that incentivize short-sighted behavior.

These are only a few, but very real, reasons why the EM consumer theme might disappoint at the stock level, even if the macro story plays out.

The Tiny Family Office and EM Exposure

So how do I translate all this into something I can hold for decades and sleep well at night?

Treat EM consumption as a structural tailwind, not a short-term catalyst.

• We’re talking 2040–2050.

• A small number of high-conviction positions.

Stay within the circle of boring products.

• Food, beverages, home care, oral care, basic beauty.

Respect price.

• Even the best businesses will disappoint if you pay 30–40x for low single-digit real growth.

• The beauty of an unloved sector is: you often get windows where the market throws the baby out with the bathwater. Those are the moments I care about.

If the long-run projections are roughly right, the large global FMCG players should do just fine – probably even from current valuation levels, provided I stay selective and disciplined on price.

In one of the next TTFO notes, I’ll put more numbers behind this theme with an investment case on a leading FMCG company and a very simple back-of-the-envelope 10-year IRR.

They will not pay their debts back in real terms, instead they will inflate them away.

For two decades, every crisis, whether financial, a pandemic or geopolitical, was met with the same response: more spending, larger central-bank balance sheets, more promises.

The result is simple arithmetic: the global sovereign-debt stock now exceeds $100 trillion, roughly equal to world GDP. What began as an emergency measure has become a structural habit.

In the Eurozone, deficits remain entrenched even during growth phases as seen in Figure 2 below. The United States behaves no differently.

The political cost of austerity is too high, and the electoral cycle too short. True reforms that would reduce deficits require pain and long-term thinking. These are two things modern democracies have systematically unlearned. This is even clearer for countries where there are more than two politically relevant parties. If really needed, reforms could be passed in the United States and the UK, much more so than in Germany, France or Italy where any party rarely has more than 25% of the votes.

Europe’s structural trap

The continent faces zero real growth, negative demographics, and rising fiscal commitments. Europe does not have the economic firepower of the United States, especially lagging in growing sectors like technology.

Social systems built for expanding populations are being supported by shrinking workforces. Take Germany’s pay-as-you-go pension system: contributions from a worker are literally transferred to a pensioner the next week. Benefits are indexed to wage growth, even as the contributor base shrinks. With an aging population, this system simply cannot function when one worker must finance not one but two dependents.

Europe’s true problem isn’t just debt. It’s demography.

The working-age population in Germany and Italy is already shrinking. Productivity cannot offset the demographic drag, and an aging electorate votes for transfers, not competitiveness.

By 2050, the age-dependency ratio in developed Europe will explode. China is hit worst, followed by Japan, Italy, Germany, and France each moving from roughly 55 % to near 80 %. The U.S. faces a more favorable, although not perfect, outlook, helped by immigration and more flexible labor markets. It also lacks a rigid pension system like Germany’s. For all major economies worldwide the trend is the same: upwards.

Central banks: lenders of last resort

The current debate about “unsustainable” debt levels forgets an essential truth: we have been here before.

As Schularick and his co-authors recently documented in “The Safety Net: Central Bank Balance Sheets and Financial Crises, 1587-2020”, central banks have acted as lenders of last resort for over 400 years.

From wars 300 years ago, to the Great Depression, and from 2008 to COVID-19, the pattern is the same as balance sheets expand, crises stabilize, and (at least in our century) capitalism survives.

Liquidity creation is the mechanism by which the system prevents collapse.

Every time the central bank balance sheet grows, financial fragility rises, but the world continues to turn.

Moral hazard increases, but so does stability. But moral hazard is not only something that applies to the financial industry - banks, shadow banking or private credit. It also has an impact on society as a whole. It shapes how we view and tolerate risk. What is the definition of risk if there is no consequence?

If I know that in a crisis the government will backing me anyway, then where is the point in maintaining financial sanity? Why not spend freely, have no savings, buy real estate at any prices, or take margin loans to invest in equities? The same applies to social security: If the government bails out companies, and supports households at any cost, why shouldn’t I demand my share? Why work hard if I can rely on government benefits?

This is certainly no moral compass that a society should want.

I am therefore not particularly worried about the existence of public debt itself.

The bond market will, at times, demand its price; nominal yields may rise; volatility will return. But as long as major economies borrow in their own currencies and their institutions remain credible, systemic collapse is not the base case.

The risk is not financial, it is political.

Inflation: the slow default

Inflation remains the politically elegant way to erode debt.

It’s the “slow default” a gradual transfer from savers to debtors that stabilizes the macro system while destroying purchasing power. It is, in effect, a stealth tax on those who hold nominal assets: deposits, pensions, and life-insurance policies.
Inflation alone will not help reduce debt or make it more serviceable if economic growth lags. This is a recipe for disaster. A shrinking economy combined with rising inflation is therefore not just an economic issue; it is a social one.

Because the majority of the population in Europe holds cash savings, not equities or property, inflation acts as an attack on middle-class wealth.

That asymmetry between the capital-owning minority and the cash-holding majority fuels political resentment. One could also argue it may fuel a generational conflict between the young work force and the dependents over time.

Capitalism

And this is where my real concern lies: not with debt levels or market volatility, but with the erosion of faith in capitalism itself. If fewer and fewer people profit from the system, if the younger population feels locked out of ownership and upward mobility then they will vote accordingly.

We no longer live under monarchies that could suppress dissent; we live in democracies where discontent expresses itself through elections.

If economic frustration deepens, voters will turn left, and so will policymakers. That means more rent controls, wealth taxes, and “excess-profit” levies. We may see all kinds of reckless policies.

Not immediately, but inevitably, as generational turnover accelerates and the median voter’s wealth position declines.

It is not only a matter of equality, of the haves and the have-nots. It is a matter of chances. If my income is crippled by exorbitant taxes to fund failing social security systems, if my employer moves career prospects abroad, if my wages stagnate: Where is my perspective? If I am young I may vote for parties that promise to take from those who have more. This risk is far smaller in the U.S. (Republicans often think Democrats are “the left,” but they have little idea how left Europe can actually be). The comparison doesn’t hold.

Old voters will dominate electorates for some time, blocking reforms and, depending on their ideology, perhaps offsetting the younger generation’s redistributive tendencies. But that is temporary. Once faith in capitalism is lost, it is almost impossible to restore, and that loss leaves scars on generations.

This is the real long-term tail risk for investors.

What this means for us as investors

For investors, the implications are clear.

The system can handle the debt most likely. Especially if debt is used to invest in the the future of a country and generate economic growth. There may be volatility in the bond market at some point. In the long-run a broken system cannot handle the political consequences. Therefore, the focus should shift from balance-sheet sustainability to political sustainability.

Government deficits ultimately flow into corporate revenues, whether that is through social systems, infrastructure, healthcare, or defense spending.

If inflation and financial repression are the long-term equilibrium, companies with pricing power, tangible assets, and recurring cash flows will outperform. Equities are the natural beneficiaries, even if higher nominal yields persist, companies will adapt.

Long-duration government bonds and fixed-income products are the ultimate losers in an inflationary equilibrium, unless governments find creative ways to force institutions and private investors to hold duration. I generally do not hold bond exposure in my portfolio, but on a family-level we have some exposure to medium-term government bonds. If rates move higher the hit will be tolerable, and nominal yields will reset over time.

Capital should be invested in jurisdictions where the social contract still favors enterprise over redistribution. For me that is still the U.S. and Europe, but it is something to monitors closely. I would not want to own companies heavily dependent on physical assets in Germany or France, for instance, where policy risk is rising, and prefer firms flexible enough to shift operations abroad if needed.

Conclusion

Debt will not kill the system. Politics might.
Public debt has become a permanent feature of advanced economies.
Central banks have learned to manage it, but capitalism requires legitimacy, and trust.

If too few people feel they benefit from it, they will vote to change the rules of the game.

For investors, the challenge is not to fear government debt, it is to anticipate the policy responses born out of inequality and resentment.

Those who hold scarce, productive assets will always be able to adapt. Those who hold nominal promises will fund the transition.

The art of living with debt is understanding that the next default may not be financial.